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August 21, 2019

Just because a real estate project will save you money this year, doesn’t mean it won’t cost you in the long run

Agile! Flex space! Move to new ways of working! Flexible lease clauses!

Never in the history of real estate has flexibility and short-term options been valued as highly as they are now. Take less space today and worry about tomorrow later. Do the minimum and add over time.

The problem with thinking about real estate this way is that there are two different real estate industries: occupiers and investors. Occupiers are always at a disadvantage to investors/owners because they require space with some degree of uncertainty. Paying for flexibility allows you to minimize your costs today but puts you at a degree of mercy tomorrow. If you are really good at estimating your future needs you may be able to make this work, but most companies are notoriously bad at predicting future needs.

WeWork (and similar) are trying to build companies around this search for flexibility. They figure they can sell annual licenses at a premium to the cost of a similar amount of space. Essentially, their model boils down to taking on the risk typically tied to a landlord (e.g. space earns no revenue) and identify revenue streams (e.g. annual licenses, services). But because they are a middleman for the risk, the cost of that risk becomes more expensive. Additionally, their licensing model further increases the cost of risk because their customers are signing up for a shorter length of time than they are signed up for.

Flexibility is an exercise in risk mitigation at a cost. Reduce costs today at the risk of higher future costs. Or take less flexibility at a lower total cost over time. Or you can take advantage of others who are paying to carry the risk until that particular game ends.

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